BANK OF AFRICA UGANDA Ltd. Annual Report and Financial Statements. For the year ended 31 December 2016

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1 BANK OF AFRICA UGANDA Ltd.

2 Table of Contents Page Annual report: Corporate information 1-2 Directors report 3-4 Statement of directors responsibilities 5 Report of the independent auditor 6-8 Financial statements: Statement of comprehensive income 9 Statement of financial position 10 Statement of changes in equity 11 Statement of cash flows 12 Notes 13-52

3 Corporate information Registered office The address of the registered office is: BANK OF AFRICA - UGANDA Ltd. Plot 45, Jinja Road P.O. Box 2750 Kampala, Uganda. Company Secretary Rehmah Nabunya Plot 45, Jinja Road P.O. Box 2750 Kampala, Uganda. Auditor PricewaterhouseCoopers Certified Public Accountants 10 th floor, Communications House 1 Colville Street P.O. Box 882 Kampala, Uganda. Branches MAIN BRANCH Plot 45, Jinja Road P.O. Box 2750 Kampala NDEEBA BRANCH Plot 1024 Masaka Road, Ndeeba P. O. Box 2750 Kampala KAMPALA ROAD BRANCH Plot 48 Kampala Road P.O. Box 2750 Kampala WANDEGEYA BRANCH KM Plaza, Plot 85 Bombo Road P. O. Box 2750 Kampala NAKIVUBO BRANCH Plot 15 Nakivubo Road P.O. Box 2750 Kampala KABALAGALA BRANCH Plot 559 Ggaba Road Kabalagala P.O. Box 2750 Kampala EQUATORIAL BRANCH Plot 84/86 Ben Kiwanuka Street P.O. Box 2750 Kampala PARK BRANCH Mukwano Centre, Plot 40/46 Ben Kiwanuka Street P.O. Box 2750 Kampala NTINDA BRANCH Plot 49 Ntinda Road, Ntinda P.O. Box 2750 Kampala ENTEBBE BRANCH Plot 16 Kampala Road P. O. Box 2750 Kampala MUKONO BRANCH Plot 13 Kampala Road P.O. Box 2750 Kampala OASIS BRANCH Oasis Mall Plot 88/94 Yusuf Lule Road P.O. Box 2750 Kampala 1

4 Corporate information (continued) Branches JINJA MAIN BRANCH Plot 1 Main Street P.O. Box 2095 Jinja ARUA BRANCH Plot 19 Avenue Road P.O. Box 894 Arua MBARARA BRANCH Plot 1 Mbaguta Road P.O. Box 1163 Mbarara FORT PORTAL BRANCH Plot 14 Bwamba Road P. O. Box 359 Fort portal KOLOLO BRANCH Plot 9 Cooper Road (Kisementi) P.O. Box 2750 Kampala JINJA CLIVE ROAD BRANCH Plot 18, Clive Road East P.O. Box 2095 Jinja LIRA BRANCH Plot 1A Balla Road P.O. Box 929 Lira MBALE BRANCH Plot 26, Cathedral Avenue P.O. Box 553 Mbale GULU BRANCH Plot 11 Awere Road P. O. Box 921 Gulu KAWEMPE BRANCH Plot 125 Bombo Road P. O. Box 2750 Kampala NANSANA BRANCH Plot 5390 Nansana P.O. Box 2750 Kampala HOIMA BRANCH Plot 13 Wright Road Hoima P. O. Box 2750 Kampala PATONGO BRANCH Plot 33 Dollo Road, Patongo P. O. Box 929 Lira NAMASUBA BRANCH Plot 4010, Entebbe Rd, Namasuba P. O. Box 2750 Kampala BUSINESS CENTRE Plot 9, Kitante Road, P.O. Box 2750 Kampala MASAKA BRANCH Plot 7, Birch Avenue Masaka LUZIRA BRANCH Plot 1329/1330 Portbell P.O. Box 2750 Kampala NATEETE BRANCH Plot 1-2 Old Masaka Road P. O. Box 2750 Kampala BBIRA MINI BRANCH Plot 2731 Mityana Road, Bulenga P. O. Box 2750 Kampala KALONGO MINI BRANCH Plot 16 Kalong Road, Kalongo TC P. O. Box 929 Lira RWENZORI MINI BRANCH Plot 1 Lumumba Avenue P. O. Box 2750 Kampala RUBIRIZI BRANCH Mbarara-Kasese Highway P. O. Box 1163 Mbarara The Bank also has a mobile banking vehicle covering nine districts and key trading centres in Lira, Pader, Oyam, Lira, Kole, Apac, Dokolo, Kaberamaido, Alebtong, and Otuke. 2

5 Directors Report The directors submit their report together with the audited financial statements for the year ended 31 December 2016, which disclose the state of affairs of BANK OF AFRICA - UGANDA Ltd. ( the Bank ). PRINCIPAL ACTIVITIES The Bank is a licensed financial institution under the Financial Institutions Act and is a member of the Uganda Bankers Association. The Bank is engaged in the business of commercial banking and the provision of related banking services. RESULTS AND DIVIDEND The Bank s profit for the year ended 31 December 2016 was Shs 12,143 million (2015: profit of Shs 519 million) as shown in the statement of comprehensive income (Page 9). The directors recommend that a dividend of Shs per ordinary share be paid for the year ended 31 December 2016 (2015: Nil). The total dividends for the year will be Shs 6,072 million (2015: Nil). DIRECTORS The directors who held office during the year and to the date of this report were: Mr. John CARRUTHERS - Chairman Mr. Arthur ISIKO - Managing Director Mr. Bernard R. MAGULU - Executive Director (Appointed on 2 May 2016) Mr. Amine BOUABID - Non-Executive Director Mr. Abdelkabir BENNANI - Non-Executive Director Mr. Mohan M. KIWANUKA - Non-Executive Director Mr. Vincent de BROUWER - Non-Executive Director Ms. Gertrude K. BYARUHANGA - Non-Executive Director CORPORATE GOVERNANCE The Bank has established a tradition of best practices in corporate governance. The corporate governance framework is based on an effective experienced board, separation of the board s supervisory role from the executive management and constitution of board committees generally comprising a majority of nonexecutive directors and chaired by a non-executive independent director to oversee critical areas. Board of Directors The Bank has a broad-based board of directors. As at 31 December 2016, the Board of Directors consisted of 8 members. The board functions as a full board and through various committees constituted to oversee specific operational areas. The board has constituted five committees. These are the Risk Management Committee, Asset and Liability Management Committee, Staff and Compensation Committee, Audit Committee, and the Credit Committee. All board committees are constituted and chaired by nonexecutive directors. The membership on these committees at 31 December 2016 was as follows: Committee Head Membership Risk Management Asset and Liability Management Non-executive director Non-executive director 1 non-executive member 2 executive members 3 non-executive members 1 executive member Meeting frequency Quarterly Quarterly Staff and Compensation Non-executive director 3 non-executive members Quarterly Audit Non-executive director 3 non-executive members Quarterly Credit Committee Non-executive director 2 non-executive members 1 executive member Quarterly 3

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8 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF BANK OF AFRICA UGANDA Ltd. Report on the audit of the financial statements Our opinion In our opinion, the financial statements give a true and fair view of the state of the financial affairs of BANK OF AFRICA UGANDA Ltd. as at 31 December 2016, and its profit and its cash flows for the year then ended in accordance with International Financial Reporting Standards and have been prepared in the manner required by the Ugandan Companies Act. What we have audited The financial statements of BANK OF AFRICA UGANDA Ltd. set out on pages 9 to 52 and comprise: the statement of financial position as at 31 December 2016; the statement of comprehensive income for the year then ended; the statement of changes in equity for the year then ended; the statement of cash flows for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing ( ISAs ). Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants ( the IESBA Code ). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code. Responsibilities of the directors for the financial statements The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and are prepared in the manner required by the Ugandan Companies Act, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. PricewaterhouseCoopers Certified Public Accountants, Communications House, 1 Colville Street, P. O. Box 882, Kampala, Uganda T: +256 (414) , +256 (312) , F: +256 (414) , Partners:CMpobusingyeDKalembaFKamulegeyaUMayanja 6

9 REPORT OF THE INDEPENDENT AUDITOR TO THE MEMBERS OF BANK OF AFRICA UGANDA Ltd. Report on the audit of the financial statements (continued) Responsibilities of the directors for the financial statements (continued) In preparing the financial statements, the directors are responsible for assessing the ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Bank or to cease operations, or have no realistic alternative but to do so. The directors are responsible for overseeing the financial reporting process. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report but does not include the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control; Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors;

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11 Statement of Comprehensive Income Notes Shs M Shs M Interest income 5 70,988 52,552 Interest expense 6 (13,427) (14,244) Net interest income 57,561 38,308 Impairment losses on loans and advances 17 (b) (2,868 ) (5,968) Net interest income after loan impairment charges 54,693 32,340 Fee and commission income 7 25,426 37,459 Fee and commission expense 8 (8,025) (13,881) Net foreign exchange gains/(losses) 9 1,129 (6,165) Other operating income 10 2,577 2,408 Operating expenses 11 (60,042) (53,654) Profit/(loss) before income tax 15,758 (1,493) Income tax (expense)/credit 13 (3,615 ) 2,012 Profit for the year 12, Other comprehensive income - - Total comprehensive profit for the year 12, Earnings per share - basic and diluted (Shs per share)

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13 Statement of Changes in Equity Notes Share capital Share premium Regulatory reserve Proposed dividends Retained earnings Total Shs M Shs M Shs M Shs M Shs M Shs M Year ended 31 December 2015 At 1 January ,421 14,757 1,628-11,851 62,657 Comprehensive income: Profit for the year Other comprehensive income Total comprehensive income Transactions with owners: Rights issue 27 12,354 8, ,211 Transfer from regulatory reserve - - (1,628) - 1,628 - At end of year 27 46,775 23, ,998 84,387 Year ended 31 December 2016 At 1 January ,775 23, ,998 84,387 Comprehensive income: Profit for the year ,143 12,143 Other comprehensive income Total comprehensive income ,143 12,143 Transactions with owners: Proposed dividends ,072 (6,072) - At end of year 27 46,775 23,614-6,072 20,069 96,530 11

14 Statement of Cash Flows Notes Shs M Shs M Cash flows from operating activities Interest receipts 56,970 52,196 Interest payments (13,043) (14,460) Net fee and commission receipts 17,401 23,578 Other income received 3,251 (4,214) Recoveries from loans previously written off 2,176 1,868 Payments to employees and suppliers (59,125) (48,279) Income tax paid 13 (3,332) (2,750) Cash flows from operating activities before changes in operating assets and liabilities 4,298 7,939 Changes in operating assets and liabilities: - loans and advances (33,499) (31,578) - cash reserve requirement (1,510) (3,665) - other assets (713) (3,583) - customer deposits 46,910 91,634 - deposits due to other banks (5,717) 26,810 - amounts due to group companies 14,697 5,610 - other liabilities 9,123 2,461 - government securities (88,089) 18,708 Net cash (utilized)/ generated from operating activities (54,500 ) 115,559 Cash flows from investing activities Purchase of property and equipment 19 (1,789) (3,240) Purchase of intangible assets 21 (1,112) (1,815) Proceeds from sale of property and equipment Net cash utilised in investing activities (2,714 ) (5,055) Cash flows from financing activities Issue of ordinary shares 27-21,211 Repayment of borrowed funds (15,423) (15,594) Net (utilized)/ cash generated from financing activities (15,423 ) 5,617 Net (decrease)/ increase in cash and cash equivalents (72,637) 116,121 Cash and cash equivalents at start of year 217, ,765 Cash and cash equivalents at end of year , ,886 12

15 Notes 1 General information The Bank is incorporated in Uganda under the Ugandan Companies Act as a limited liability company, and is domiciled in Uganda. The address of its registered office is: BANK OF AFRICA UGANDA Ltd. Plot 45, Jinja road P.O. Box 2750 Kampala, Uganda For the Ugandan Companies Act reporting purposes, the balance sheet is represented by the statement of financial position and the profit and loss account is represented by the statement of comprehensive income in these financial statements. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. (a) Basis of preparation The financial statements are prepared in compliance with International Financial Reporting Standards (IFRS). The measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The financial statements are presented in Uganda Shillings, rounded to the nearest million (Shs M). The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions. It also requires management to exercise its judgement in the process of applying the Bank s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 3. Changes in accounting policy and disclosures (i) New and amended standards adopted by the Bank The following standards and amendments have been applied by the Bank for the first time for the financial year beginning 1 January 2016: Amendments to IAS 1, Presentation of Financial Statements : The amendments are made in the context of the IASB s Disclosure Initiative, which explores how financial statement disclosures can be improved. The amendments, effective 1 January 2016, provide clarifications on a number of issues, including: Materiality an entity should not aggregate or disaggregate information in a manner that obscures useful information. Where items are material, sufficient information must be provided to explain the impact on the financial position or performance. Disaggregation and subtotals line items specified in IAS 1 may need to be disaggregated where this is relevant to an understanding of the entity s financial position or performance. Notes confirmation that the notes do not need to be presented in a particular order. 13

16 2 Summary of significant accounting policies (continued) (i) New and amended standards adopted by the Bank Other comprehensive income arising from investments accounted for under the equity method the share of other comprehensive income arising from equity-accounted investments is grouped based on whether the items will or will not subsequently be reclassified to profit or loss. Each group should then be presented as a single line item in the statement of other comprehensive income. Annual Improvements to the IFRSs Cycle: The latest annual improvements, effective 1 January 2016, clarify: IFRS 5 when an asset (or disposal group) is reclassified from held for sale to held for distribution or vice versa, this does not constitute a change to a plan of sale or distribution and does not have to be accounted for as such. IFRS 7 specific guidance for transferred financial assets to help management determine whether the terms of a servicing arrangement constitute continuing involvement and, therefore, whether the asset qualifies for de recognition. IFRS 7 that the additional disclosures relating to the offsetting of financial assets and financial liabilities only need to be included in interim reports if required by IAS 34. IAS 19 that when determining the discount rate for post-employment benefit obligations, it is the currency that the liabilities are denominated in that is important and not the country where they arise. IAS 34 what is meant by the reference in the standard to information disclosed elsewhere in the interim financial report and adds a requirement to cross-reference from the interim financial statements to the location of that information and make the information available to users on the same terms and at the same time as the interim financial statements. Amendments to IAS 16 and IAS 38: The IASB has amended IAS 16 Property, Plant and Equipment to clarify that a revenue-based method should not be used to calculate the depreciation of items of property, plant and equipment. IAS 38 Intangible Assets now includes a rebuttable presumption that the amortisation of intangible assets based on revenue is inappropriate. This presumption can be overcome if either The intangible asset is expressed as a measure of revenue (i.e. where a measure of revenue is the limiting factor on the value that can be derived from the asset), or It can be shown that revenue and the consumption of economic benefits generated by the asset are highly correlated. 14

17 2 Summary of significant accounting policies (continued) (ii) New standards and interpretations early adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after 1 January 2016, and have not been applied in preparing these financial statements. None of these is expected to have a significant effect on the financial statements of the Company, except the following set out below: IFRS 9, Financial instruments ( IFRS 9 ) IFRS 9 addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of IFRS 9 was issued in July It replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income, and fair value through the profit or loss. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. IFRS 15, Revenue from contracts with customers ( IFRS 15 ) IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 Revenue and IAS 11 Construction contracts and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted. IFRS 16, Leases ( IFRS 16 ) Lessees are now required to recognise assets and liabilities arising from all leases (with limited exceptions) in the statement of financial position. Lessor accounting has not substantially changed in the new standard. The model reflects that, at the start of a lease, the lessee obtains the right to use an asset for a period of time and has an obligation to pay for that right. A lessee is not required to recognise assets and liabilities for short-term leases (12 months or less) which contain no purchase options, and leases where the underlying asset has low value when new (such as personal computers or small items of office furniture). Instead, these can be accounted for as expenses on a straight-line basis over the lease term or using another systematic basis. A lessee measures lease liabilities at the present value of future lease payments. A lessee measures lease assets, initially at the same amount as lease liabilities, and also includes costs directly related to entering into the lease. Lease assets are amortised in a similar way to other assets such as property, plant and equipment. 15

18 2 Summary of significant accounting policies (continued) (ii) New standards and interpretations early adopted (continued) This approach will result in a more faithful representation of a lessee s assets and liabilities and, together with enhanced disclosures, will provide greater transparency of a lessee s financial leverage and capital employed. One of the implications of the new standard is that there will be a change to key financial ratios derived from a lessee s assets and liabilities (for example, leverage and performance ratios). IFRS 16 supersedes IAS 17, Leases, IFRIC 4, Determining whether an Arrangement contains a Lease, SIC 15, Operating Leases Incentives and SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning 1 January Early adoption is permitted only if IFRS 15 is adopted at the same time. Recognition of Deferred Tax Asset for Unrealised Losses - Amendment to IAS 12: Amendments made to IAS 12 in January 2016 clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset s tax base. Specifically, the amendments confirm that: A temporary difference exists whenever the carrying amount of an asset is less than its tax base at the end of the reporting period; An entity can assume that it will recover an amount higher than the carrying amount of an asset to estimate its future taxable profit; Where the tax law restricts the source of taxable profits against which particular types of deferred tax assets can be recovered, the recoverability of the deferred tax assets can only be assessed in combination with other deferred tax assets of the same type; Tax deductions resulting from the reversal of deferred tax assets are excluded from the estimated future taxable profit that is used to evaluate the recoverability of those assets. The amendment to IAS 12 is effective 1 January 2017 Disclosure Initiative Amendments to IAS 7: Effective 1 January 2017, entities will be required to explain changes in their liabilities arising from financing activities. This includes changes arising from cash flows (e.g. drawdowns and repayments of borrowings) and on cash changes such as acquisitions, disposals, accretion of interest and unrealized exchange differences. Changes in financial assets must be included in this disclosure if the cash flows were, or will be included in cash flows from financing activities. This could be the case, for example, for assets that hedge liabilities arising from financing liabilities. Entities may include changes in other items as part of this disclosure, for example, by providing a net debt reconciliation. However, in this case the changes in other items must be disclosed separately from the changes in liabilities arising from financing activities. The information may be disclosed in tabular format as a reconciliation from opening and closing balances, but a specific format is not mandated. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company. 16

19 2 Summary of significant accounting policies (continued) (b) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The financial statements are presented in Uganda Shillings ( Shs ) which is the Bank s functional currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. Translation differences on non-monetary financial assets and liabilities, such as equities held at fair value through profit or loss, are recognised in profit or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets, such as equities classified as available-for-sale financial assets, are included in the available-for-sale reserve in equity. (c) Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within interest income or interest expense respectively in the statement of comprehensive income using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss. (d) Fees and commission Fees and commission income and expense that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised over the life of the loan. Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan syndication fees are recognised as revenue when the syndication has been completed and the Bank has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party such as the arrangement of the acquisition of shares or other securities, or the purchase or sale of businesses are recognised on completion of the underlying transaction. 17

20 2 Summary of significant accounting policies (continued) (e) Financial assets The Bank classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans and advances; held-to-maturity financial assets and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. Currently the Bank does not have financial assets at fair value through profit or loss. (i) Financial assets at fair value through profit or loss This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading. Financial assets are designated at fair value through profit or loss when: doing so significantly reduces or eliminates a measurement inconsistency; or they form part of a group of financial assets that is managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis. (ii) Loans and advances Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: those classified as held for trading and those that the Bank on initial recognition designates as at fair value through profit and loss; those that the Bank upon initial recognition designates as available-for-sale; or those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration. (iii) Held-to maturity financial assets Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the positive intention and ability to hold to maturity. Were the Bank to sell more than an insignificant amount of held-to-maturity assets, the entire category would have to be reclassified as available for sale. (iv) Available-for-sale financial assets Available-for-sale assets are non-derivatives that are either designated in this category or not classified in any other categories. 18

21 2 Summary of significant accounting policies (continued) (e) Financial assets (continued) (iv) Available-for-sale financial assets (continued) Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade date, which is the date on which the Bank commits to purchase or sell the asset. Financial assets are initially recognised at fair value, plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Bank has transferred substantially all risks and rewards of ownership. Availablefor-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity financial assets are subsequently carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in the statement of comprehensive income in the period in which they arise. Changes in the fair value of monetary and non-monetary securities classified as availablefor-sale are recognised in other comprehensive income. When securities classified as available-forsale are sold or impaired, the accumulated fair value adjustments are included in the statement of comprehensive income as gains and losses from investment securities. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models refined to reflect the issuer s specific circumstances. (f) Derivative financial instruments Derivatives, which comprise solely of forward foreign exchange contracts, are initially recognised at fair value on the date the derivative contract is entered into and are subsequently measured at fair value. The fair value is determined using forward exchange market rates at the balance sheet date or appropriate pricing models. The derivatives do not qualify for hedge accounting. Changes in the fair value of derivatives are recognised immediately in the statement of comprehensive income. (g) Sale and repurchase agreements Securities sold subject to repurchase agreements ( repos ) are classified in the financial statements as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell ( reverse repos ) are recorded as loans and advances to customers or placements with other banks, as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. (h) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 19

22 2 Summary of significant accounting policies (continued) (i) Impairment of financial assets The Bank assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: (i). (ii). (iii). (iv). (v). (vi). significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: - - adverse changes in the payment status of borrowers in the portfolio; and national or local economic conditions that correlate with defaults on the assets in the portfolio. The estimated period between a loss occurring and its identification is determined by management for each identified portfolio. In general, the periods used vary between 1 month and 12 months. (i) Assets carried at amortised cost The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial instrument s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. If a loan or held-to-maturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. 20

23 2 Summary of significant accounting policies (continued) (i) Impairment of financial assets (continued) (i) Assets carried at amortised cost (continued) For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on the basis of the Bank s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and historical loss experience for assets with credit risk characteristics similar to those in the Bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Impairment charges relating to loans and advances to customers are classified in loan impairment charges whilst impairment charges relating to investment securities are classified in Net gains/ (losses) on investment securities. Subsequent recoveries of amounts previously written off increase the amount of other income in the statement of comprehensive income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of comprehensive income. In addition to the measurement of the impairment losses on loans and advances in accordance with IFRS as set out above, the Bank is required by the Financial Institutions Act to estimate losses on loans and advances as follows: 1) Specific provision for the loans and advances considered non performing (impaired) based on the criteria, and classification of such loans and advances established by the Bank of Uganda, as follows: a) b) c) Substandard loans with arrears period from 90 to 179 days 20% provision Doubtful loans and advances with arrears period from 180 to 364 days 50% provision; and Loss with arrears period exceeding 364 days 100% provision 2) General provision of 1% of credit facilities less specific provisions and suspended interest. In the event that provisions computed in accordance with the Financial Institutions Act exceed provisions determined in accordance with IFRS, the excess is accounted for as an appropriation of retained earnings. Otherwise no further accounting entries are made. 21

24 2 Summary of significant accounting policies (continued) (ii) Assets carried at fair value In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss is removed from equity and recognised in the Statement of comprehensive income. Impairment losses recognised in the statement of comprehensive income on equity instruments are not reversed through the statement of comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through the statement of comprehensive income. (j) Property and equipment Land and buildings comprise mainly of branches and offices. All property and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of these assets. Subsequent expenditures are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are charged to operating expenses during the period in which they are incurred. Freehold land is not depreciated. Depreciation on other assets is calculated on the straight line basis to allocate their cost less their residual values over their estimated useful lives, as follows: Buildings Shorter of: period of lease or 50 years Motor vehicles 4 years Fixtures, fittings and equipment 3-8 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. The Bank assesses at each balance sheet date whether there is any indication that any item of property and equipment is impaired. If any such indication exists, the Bank estimates the recoverable amount of the relevant assets. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Gains and losses on disposal are determined by comparing proceeds with the carrying amount. These are included in other income in the statement of comprehensive income. 22

25 2 Summary of significant accounting policies (continued) (k) Intangible assets Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (five years). Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognised as intangible assets when the following criteria are met: it is technically feasible to complete the software product so that it will be available for use; management intends to complete the software product and use or sell it; there is ability to use or sell the software product; it can be demonstrated how the software product will generate probable future economic benefits; adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and the expenditure attributable to the software product during its development can be reliably measured. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding five years). (l) Income tax The income tax expense for the period comprises current and deferred income tax. Income tax is recognised in the Statement of comprehensive income except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive income or directly in equity, respectively. Current income tax is the amount of income tax payable on the taxable profit for the year determined in accordance with the Ugandan Income Tax Act. The current income tax charge is calculated on the basis of the tax enacted or substantively enacted at the balance sheet date. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax liability is settled or the related deferred income tax asset is realised. Deferred income tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. 23

26 2 Summary of significant accounting policies (continued) (m) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, including: cash and non-restricted balances with the Central Bank, treasury and other eligible bills, and amounts due from other banks. Cash and cash equivalents excludes the cash reserve requirement held with the Central Bank. (n) Employee benefits (i) Retirement benefit obligations The Bank operates a defined contribution retirement benefit scheme for all its permanent confirmed employees. The Bank and all its employees also contribute to the National Social Security Fund, which is a defined contribution scheme. A defined contribution plan is a retirement benefit plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the Bank and the employees. The Bank s contributions to the defined contribution schemes are charged to the statement of comprehensive income in the year in which they fall due. (ii) Other entitlements The estimated monetary liability for employees accrued annual leave entitlement at the balance sheet date is recognised as an expense accrual. (o) Customer deposits Deposits from customers are measured at amortised cost using the effective interest rate method. (p) Borrowings Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is recognised in the Statement of comprehensive income over the period of the borrowings using the effective interest method. (q) Share capital Ordinary shares are classified as share capital in equity and measured at the fair value of consideration receivable without subsequent re-measurement. Any premium received over and above the par value of the shares is classified as share premium in equity. (r) Dividends Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are shown as a separate component of equity until declared. 24